75% of my £500 bonus went on Income Tax, VAT, Duty, Etc – How Much is a “Fair Share” ?

Lets Imagine I am a top rate taxpayer and I receive a £500 bonus, if I spend it all, how much goes into the real economy to buy goods and how much is taken by the government in taxes, duties, etc as its “Fair Share”:

Tax

Goods

Bonus

£ 500.00

Income Tax

-£ 250.00

£ 250.00

National Insurance

-£ 10.00

£ 10.00

Cash Received

£ 240.00

Fill Car

Petrol

-£ 21.04

£ 21.04

Fuel Duty

-£ 21.08

£ 21.08

VAT

-£ 8.42

£ 8.42

Buy Pack Cigarretes

Cigarrettes

-£ 1.64

£ 1.64

Tax

-£ 5.83

£ 5.83

Buy 2 Bottles of Whisky

Single Malt Whisky

-£ 35.00

£ 35.00

Tax

-£ 25.00

£ 25.00

Buy gift for wife

Cost of Gift

-£ 101.66

£ 101.66

VAT

-£ 20.33

£ 20.33

£ -

£ 340.66

£ 159.34

68.1%

31.9%

So it would appear that a “fair share” for the state of my hard earned £500 bonus is 68.1% ?

But, that’s not the whole story, because the £159.34 of “goods” is paid to the companies that produce them and a good part of the cost of those goods is made up of tax.

Assume that the companies involved pay 50% for materials, 40% for Labour and make a 10% pre tax profit:

Revenue

£ 159.34

Tax

Goods

Materials

-£ 79.67

£ 79.67

Net Pay To Workers

-£ 45.79

£ 45.79

PAYE

-£ 11.45

£ 11.45

Employers NI

-£ 5.95

£ 5.95

Employees NI

-£ 0.55

£ 0.55

Pre Tax Profit

£ 15.93

Tax

-£ 3.19

£ 3.19

Dividends

£ 12.75

Income Tax on Dividends

-£ 1.27

£ 1.27

Dividends Received

£ 11.47

£ 22.41

£ 136.93

14.1%

85.9%

So the state’s “fair share” is up to (£22.41+£340.66)/£500 = 72.6%

But there is more:

The raw materials of £79.67 purchased by the companies represent the revenue of the companies for whom the raw materials are the outputs and are increased in cost because of tax. So assume 14.1% of that amount also goes in tax, another £11.15 for the state.

(£22.41+£340.66+11.15)/£500 = 74.8%

Allowing for the fact that this process continues further still down the supply chain It does not seem unreasonable to assume that ultimately the state will take 75%+ of the bonus.

I get to keep just 25% of the value in free market goods and services and the state takes the rest. Yet, still the left demand higher taxes so I pay my “Fair Share”!

You can’t really take taxes paid by the people who make the things you buy into the calculation.. they are not a take from your income, they are a take from someone else’s. You have paid, to them, the market value of what they have produced and if they are subsequently taxed upon that then that’s not of your concern. Their price may well be inflated due to taxes.. but by the same measure, so was your bonus. With your logic we could take it backwards to whomever bought the product which enabled you to earn your bonus, and claim that all of this tax is born by them.

The state takes a slice of almost every transaction.. so if you follow things through far enough then they get everything (unless the money is exported, in which case a different state gets it). Your overall point is not invalidated by that.. and it illustrates just how quickly the state will get a large portion. The financial services industry also takes a cut on every transaction… but in these transactions it’s infinitesimal.. so it would take them a great deal longer.

Rolo Tamasi

Whether you have paid the market value, have a preferential discount or have been ripped off, the State has still taken a slice from the activity, which you have paid for.

(The customer bears all the costs of the supply chain unless someone is going bankrupt)

Tim Carpenter

It will be “fair” when you have to resort to going cap-in-hand to ask for handouts and housing.

And that is the fate of us outside “the system” unless something is done to reverse it.

Joakim Book

Hey there!

Just found your blog, and I like it this far.

The examples you/he use is a bit sneaky, all using the most highly-taxed goods (such as petrol and cigarettes). Though the point is still valid; a large part of what you earn are not yours to keep.